HSAs have layers of tax-advantages and uses, making them an ideal savings account
A question I receive often is… where should I put my next dollar? The answer, of course, depends on the person’s upcoming cash obligations and goals. However, in many situations, I find an HSA is a great choice and often overlooked. To some degree I think it’s because they’re conflated with Flex Savings Accounts (FSAs). FSAs are a “use it or lose it” vehicle that provides tax-deductible contributions if the funds are used for medical-related reimbursements. But their big drawback is if you don’t use your contribution within the same year – you lose it. The only recent exception has been related to COVID. Health Savings Accounts (HSAs) are different in that contributions don’t have a time limit for use, are portable if you leave your employer, and can be invested.
You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
The contributions remain in your account until you use them.
The interest or other earnings on the assets in the account are tax free.
Distributions may be tax free if you pay qualified medical expenses.
It’s the tax-trifecta!
- Deductibles, co-pays, co-insurance, prescriptions, dental, vision
- Over-the-counter medication (woo-hoo, that wasn’t always the case!)
- Menstrual products (Yasss!! Definitely not always the case!)
- Long-term care insurance premiums
- COBRA premiums or premiums paid while on unemployment
- Medicare premiums